"Zombie Lending and Depressed Restructuring in Japan"

Takeo Hoshi, Graduate School of International Relations and Pacific Studies, University of California, San Diego

The talk is based on the following two recent papers by Professor Hoshi. 

“Economics of the Living Dead” Japanese Economic Review, 57:1, 30-49, March 2006.

Zombie firms are those firms that are insolvent and have little hope of recovery but avoid failure thanks to support from their banks.  This paper identifies zombie firms in Japan, and compares the characteristics of zombies to other firms.  Zombie firms are found to be less profitable, more indebted, more dependent on their main banks, more likely to be found in non-manufacturing industries and more often located outside large metropolitan areas.    Zombie firms tend to increase employment by more (but do not reduce employment by more) than non-zombies.  Finally, when the proportion of zombie firms in an industry increases, job creation declines and job destruction increases, and the effects are stronger for non-zombies.   

“Zombie Lending and Depressed Restructuring in Japan” (Joint with Ricardo Caballero and Anil Kashyap), NBER Working Paper 12129.

This paper starts with the well-known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections.  To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (called zombies).  Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted.  The model in this paper highlights the restructuring implications of the zombie problem.  The counterpart of the congestion created by the zombies is a reduction of the profits for healthy firms, which discourages their entry and investment.  Empirical analysis confirms the model's key predictions that zombie dominated industries exhibit more depressed job creation and destruction, and lower productivity.  The paper presents firm-level regressions showing that the increase in zombies depressed the investment and employment growth of non-zombies and widened the productivity gap between zombies and non-zombies.